Episode 17 – Money Myth #4: Building Wealth by Choosing the Right Stocks

Welcome to the Millennial Money Moves Podcast. On this episode, we’re diving into money myth number four, stock picking.
The myth here is that individuals and professional investment advisors can consistently and predictably grow wealth through individual stock selection. The reality of it is that it’s just one big gamble when you’re picking individual stocks.
Some people get lucky, but there are many, many who lose it all. Hope you enjoy this episode. This content is purely educational and does not tend to be financial advice or financial planning.
Please consult your professional financial advisor or tax professional to receive tailored advice to your personal situation. Babin Wealth Management is not responsible for action taken by listeners based on educational content provided.
If you would like to receive personal financial advice, please reach out to Babin Wealth Management directly at babinwealth.com. Let’s make moves. Welcome, everybody, to another episode of the Millennial Money Moves podcast.
I am your host, Sean Babin. We got my guy, Blake Bandani, our co-host. We’re back at it.
Good to see you, buddy.
Always good to see you. Let’s get it, baby.
I think I start every episode in the exact same routine, so that’s fun. I can’t get out of it.
I think people think it’s a recording, but it’s actually not. Fun fact, he does it live every time.
My guy, Blake Bandani, I think that’s the word I use every single time. Good to see you, man. I know it’s been a couple of weeks, and so we’re glad to be back here with another money myth.
If you’ve been keeping track, this is money myth number four, and we’re going to be diving in to stock picking. So that’s the myth.
Can individuals pick stocks correctly and make money out of it, as well as investment advisors, professional money managers?
Are there people out there who know what they’re doing, who are smarter than the market and can pick stocks, the right ones, and make more money than everybody else consistently? That’s the term here, consistently.
So that’s the myth that we’re going to dive into. And of course, when we’re doing our money myths, and we need a really, really smart person to join us, we’ve got Kenny Gatliff, CFA. Man, do we appreciate having you, buddy.
Thanks for joining us for this one.
Yeah, looking forward to it. This is a good one.
And no better person to have, Sean, on this topic than this man right here, Kenny. So I’m excited. I get to drill Kenny with questions too.
I wonder if he’s got any fun slides for us.
I got a couple of fun ones.
Let’s see if he can pull some out if he needs to, but he doesn’t even need them.
No, I don’t come with visual aids.
All right, cool. It’s all in his head. That makes sense too.
Well, let’s dive in. I want to start this. Like I said, I want to go over a couple of different avenues.
So one is just the retail investor, person on their TD Ameritrade app or Schwab app or whatever they’ve got, picking stocks and thinking they know what they’re doing.
Then we’re going to go over a paid financial advisor thinking that they know what they’re doing picking stocks.
And then we’re going to discuss active management and paying professional money managers who think they can predictively pick stocks that can outperform the market. And hopefully by the end of this, you can see that picking stocks is just a gamble.
And if it wins, great. Just know you kind of hit the lottery. It was luck more than skill.
And there’s better ways to make money for you consistently. Money myth number four, stock picking. Let’s dive into it.
So where I want to start is on the retail or individual side.
For whatever notion there is out there that investing is just picking your favorite stocks, putting money into it, watching it up and down each day, knowing when to get out, knowing when to get in.
And somehow you feel like you’ve got this competitive advantage or edge that, you know, I just bought Tesla. Elon Musk is a super smart guy. Everyone’s going to own a Tesla one day.
I’m putting all my money into Tesla for the next 10 years. And I’m picking and I’m making stocks and I’m investing and I’m making money.
That’s kind of the general consensus that I feel for most individuals, especially individuals who don’t have a lot of money.
Like personally, when I first started making money, you know, and I’m in finance, like I pick stocks, I thought that was the way to go. You know, I was doing some research on different stocks. I kind of, you know, in school, you learn about stocks.
You don’t really learn about mutual funds and ETFs. You learn about stocks and how to value them and, you know, look at charts and things like that. And so, I was kind of programmed right out of school.
Like that was how you made money, was to pick stocks. So there I was, you know, maybe had an extra couple hundred bucks each month, and I was putting in at stocks. And boy, that was just an emotional roller coaster.
You know, some stocks were just blue chip names that everyone knew, and some stocks were these penny stocks, because when you have no money, the name of the game is getting more shares.
So when you need to buy more shares to make more money, if it works, then you go to these cheap, cheap stocks. So instead of buying 5 shares, you can buy 500 shares. So you know, that’s what I was doing.
And every day, I was checking my apps and looking at different things and hopefully making money and losing money. And then I remember, like a couple years into it, you know, half were down, half were up, and I basically had made nothing.
And the market had done pretty well relative. When I say the market, you know, the major 500 companies, the Dow Jones, the NASDAQ, those kind of companies had done well.
And here I was pretty much break even after a year and a half, two years of doing it. And I’m going, you know, what the heck is going on here? And so that was my kind of assumption early on.
And I think that rings true for a lot of people out there is, hey, the easiest way to get started investing is take your money and buy five stocks. Talk to me, boys. What are your thoughts?
I would say, Sean, to what you just broke down, I mean, you had some background in finance, right?
Imagine your average person that works blue collar job is getting told how great it is to do it. You got to set your investments up. You got to start setting up yourself for a successful retirement.
And that’s the first step, is just getting someone to actually put money aside. I think then you go to step two and it’s like, well, okay, I got good behavior here. I’m going to put some money away.
But now they have how many stocks and mutual funds options are there out there, right? It’s unheard of. So you’re right.
I think a lot of viewers, and unless you’re a Kenny, which Kenny’s taken decades of experience in this, it’s hard to… How do you even guide someone in this decision, right? How do you even tell them what to do, I guess, is my point.
Yeah.
And I think that is the hard part is people don’t really know what to expect and don’t know what they’re getting into. So the easiest thing is to watch MSNBC. You see these tickers.
Everyone knows those big stocks have been doing well. So that does seem like the most logical choice. And I think there’s part of the myth within the myth here is the idea of people say, look, I know what companies are going to do well.
You can look at Apple, Amazon, all these companies have done well forever. There’s no reason to think they’re not going to be successful. So I put my money in them and it’s probably that there’s not a lot of risk there.
And I think what people don’t understand is that a good company doesn’t necessarily mean a good stock return over the next 10 years. The price actually matters. The valuation matters.
And everyone that’s already priced it to its current price in a fairly efficient market where there’s a lot of buyers and sellers, everyone that is also buying and selling this stock knows that Apple is a good company and Amazon is a good company.
And they’re setting the price accordingly. So these prices aren’t set on just randomly. And then if that company is successful, you’re going to do great.
These prices are set assuming these companies are going to do great. And if they even underperform just a little bit, you actually could lose money on that company.
And I think that’s the thing most people don’t either they don’t understand or they don’t even think about on the onset.
So I think that’s mistake number one in thinking that you can do a good job picking a stock is assuming that if you can pick a good company, you can make money.
Yeah, I mean, look at this year right now, the general market, like my most aggressive portfolios are up probably 12 to 13 percent after today for the year. Apple’s down seven and a half percent this year so far.
So that’s like almost a 20 percent difference. And again, Apple’s had years where it’s absolutely crushed the portfolios I have. But inevitably, there will be moments where do we all believe in Apple?
Do I still own an iPhone? Do I still want the next one? Yeah, but there are these moments in time, like Kenny mentioned, where they’ve just gone up so high for so long that they have to continue to crush every single expectation.
And it’s just not the reality of it. So eventually, it’s going to have some kind of pullback. And so are you buying in at the top or are you buying in 20 years ago and rode this wave?
And how many years are you going to underperform versus outperform by being that stock picker and taking that very, very concentrated risk of putting your hard earned money on the line and saying, I’m going to live or die by what Apple and Tesla do
and Elon must do and whatever happens, happens versus having kind of a strategic approach to it. But it’s so interesting to me that that’s how people think like real wealth is created.
And I think in a day and age where we see, we have access to everybody’s social media and Instagram and TikTok and all these things where you’re seeing people day trade and say you’re known that they’re making a million dollars a month trading and
all this bullshit, like you can just lie about all this stuff, which is super easy to do. It gets this like, our generation, I think has this huge FOMO thing of like, I need wealth yesterday.
However, it’s going to, however I can do it, I’m going to do it.
If this guy on TikTok says that this stock is undervalued and I can throw a thousand bucks at it and buy 500 shares because it’s $2 a share, I’m going to, and it’s going to go to $4, like I’m going to do it.
And there’s just this like, perceived notion of get rich quick schemes.
And I think that’s what people think stocks are potentially for them is let’s, if I buy this dollar stock, all it has to do is go to $2 and I make a hundred percent, like how hard does that got to be?
And I got, like I said at the jump, I got caught up in that early as well. Like I said, picking penny stocks.
I’ll never forget the first job I had, I worked for a small advisor in Reno, and all of a sudden I started getting phone calls from what I learned out later is a stock basically hustler.
He’s paid by stock, publicly traded companies to call advisors all over the country and push a stock. I didn’t know that at the time, I just thought this guy was nice giving me kind of stock picks, things to help out.
So he continues to call me, he’s pushing this one, I’m looking at it. I’m sitting in on earning calls. I’m getting to know this company really, really well.
The ins and outs, what they make, what their products are, what their margins are, and when their next earnings calls are gonna be. I think I started watching it at like a quarter. I was trading at 25 cents a share.
Then it started to get closer to 50 cents a share. And I’m like, all right, this thing’s making some moves. Let’s put some money at it.
So, a college kid, let’s see, I probably had a thousand bucks, not a lot of money, but to me, it was everything I had at that moment. And I started watching this thing, and sure enough, 50 cents went to 75 cents.
And I keep listening to these earning calls. This guy keeps telling me, he’s calling me every month, hey, this is still a great company. They’re up to great things.
Any of your clients or anybody you know has money, put more money into this thing. And I’m going, man, this is gonna be my ticket. So in college, where do you go when you need more money?
Mom and dad, of course.
Mom and dad, there you go.
So I call mom and dad, and I go, I’m getting a finance degree, I’m working for an investment advisor. We got this really good opportunity with this stock. And they agreed to give me, I think it was like $5,000 at the time.
I’m not sure what $5,000 meant to them, but that’s a lot of money to just hand over your kid to put into a stock. And man, they gave me that five grand, I invested it, and all of a sudden, five grand. So we’ve got about six grand total.
So I got six grand invested, and all of a sudden, this thing is just going up. And I’m checking my account every day, and six grand is now 10 grand. 10 grand gets to almost $20,000.
When you’re in college and you’re 19 years old, and you go open your TD Ameritrade app, and you’ve got $20,000 in there, you are losing it. Like I was bringing in all my roommates to come check out my account balance. You gotta see this.
But what’s fascinating when you pick stocks and it’s making you money is it’s never enough. When it was 20 grand, I wanted 40 grand. And if it ever got to 40 grand, I was thinking, what am I gonna do with 100 grand?
Like you are never ever innocent in a mode where you’re like, you know what, I just turned six grand into 20 grand. I need to take this as a win and walk away. Like you do with the casino.
I was just gonna say, you sound like you might need a gambling hotline, Sean.
That’s all stock picking is.
It’s just straight gambling. It’s the same enjoyment that you get, but you gotta know when to quit. And it’s the same thing if you’re making money in stocks.
Same on the other inverse too, if you’re losing money.
But anyways, I’ll never forget that feeling of literally seeing 18,000 and not being satisfied and not being like, you know what, let’s just take the win, get your parents their part back, get my part back and be thankful that we did this, we made a
lot more money than we would have otherwise. No, like you get freaking greedy and you just want more. So then, of course, what happens?
Well, 18 grand goes to 15 grand, 15 grand goes to 12 grand, 12 goes to back down to about nine, and you’re like sitting there thinking, there’s no way I’m selling, like just another week, another month, this thing’s got to come back.
And I think when it finally got back to the original investment, like I said, it’s about 6,000 bucks, 6,000 with me, 5,000 for my parents. I finally cut it.
And like I couldn’t believe, I was sitting there in disbelief that I literally watched my balance in my account go from 18,000 back to 6 grand.
And I did nothing in between because I kept holding on to this emotional idea that just one more week, it’s got to turn around, like we’ve gone from 18 grand to 10 grand, like this is a huge dip opportunity.
Somebody’s got to come in and push this higher. And it’s this crazy emotional roller coaster that you go on with yourself and stock picking that you lose all rationality of making money. And it literally…
You were asking your parents for 5 grand and you just got it to 20 grand and you still wanted, you were thinking about 100 grand, you know, it’s crazy.
It’s what happens.
It’s absolutely what happens. And the contentment is never there for you. You just want more.
You just get greedy. So, when I see Do It Yourselfers, all of them will tell you about their wins. Hey, I bought Tesla back in 2012, and I bought Facebook when it IPO’ed, and I bought Apple as soon as I saw the Forrest Gump movie.
You know, stuff like that. And sure, maybe they put 100 bucks into it. None of them put, you know, millions of dollars into it or whatever, but they never tell you about those, the losers.
They never open up the kimono and say, hey, I, you know, I invest myself, and I barely break even kind of thing. It’s same with gambling now.
I think, you know, people who have their gambling apps, they’ll tell you about the five-leg parlay that they hit for turning 50 bucks into 500 bucks. But they don’t tell you that they also lost 500 bucks on stupid bets the week before.
Or that they’re not even broken even yet.
Yeah, I just wanted to share that personal story of like, that’s how quickly you can get wrapped up into this stuff, and how quickly you could potentially make money if it’s done right.
And it was all luck, like it was 100% luck, but in the moment, you think it’s skill because you’re paying attention, you’re listening to calls, you’ve got this quote unquote stock hustler guy calling me every month telling me to put as much more than
I can because good things are around the corner. And so the system is completely rigged against you to make money in picking stocks. Would you agree, Kenny?
Yeah, and so you bring up a good point there of like, you know, obviously, if you think you know the right company to get in and you’re right, that’s still only step one. And you can, you know, put money in and do well for some amount of time.
But then the step two is knowing when to get out. And you’ve got to do this right over and over and over again to consistently do well. And I think that’s kind of what people miss as well of, you know, that there’s a thing called asymmetric risk.
And if you’re putting money into individual stocks and you’re doing well time and time again, you know, 5, 10, 15 straight makes, for one, you have to know when to sell, because oftentimes those things, as you said, even not penny stocks, but just
regular stocks, they go up and they come back down. And yeah, if you buy it right, it goes up, you time it at the top, you get out, you’ve done very well.
But then there’s also the aspect of, if you’re making little chunks, 10% here, 15% here on this stock, once you have that big miss, it doesn’t matter how many 10% ups you have in a row, if you have 100% down. That’s still overall 100% down.
So obviously, that’s kind of an extreme example, but I think that’s another reason why people don’t realize that the cards are stacked against them a little bit, is it kind of feels like, I’ve hit a few in a row correct, and yeah, I didn’t quite get
out of the top, or it could have done better, but then all of a sudden, you just have that one that goes down dramatically, and you’re over-concentrated in it. Sean, we’ve talked about this data before, but if you have a nine percent, what was it, a
nine percent loss takes ten percent to get back, but a fifty percent loss takes a hundred percent to get back, and what’s it, a seventy-five percent loss takes four hundred percent to get back. So, it’s not just saying, oh, one went up ten, one went
down ten, one went up fifty, the other went down fifty. You know, you have to be so much better than what feels like average to do well, that it is like that gambling thing.
You’re like, man, I thought I had a couple good hits, I hit that parlay, and then you look at your balance, and you’re down with more than you started.
And it’s like, boy, I feel like I was doing well, and I think that is kind of where it gets you, is you don’t even understand the risk going in, because you don’t really understand the numbers and the statistics behind what it actually takes to get
an annualized 10% return year after year. It’s really hard to do.
So Kenny, are you saying you need to know when to hold them and when to fold them?
Exactly.
Hey, but you know, real quick, Sean, unless you had a thought, because I did want to ask Kenny something about what he said earlier, unless you needed to on that point.
What I was going to piggyback on that point is most do-it-yourself investors don’t consider what’s called the opportunity cost of holding on to that.
So like I did with that stock where I went high and then I rode out all the way to the bottom and just kept waiting and waiting for it to turn around. Well, that’s what a ton of people do.
They’ll sit on these stocks that maybe at one point were really high. They never sold. And now it’s here.
And they’re like they they come up with some high watermark in their head. Let’s say it was at 50 bucks a share. Now it’s at 20.
And they’re like, OK, if it ever gets back to 40, I’m going to sell it. Well, what if it never gets back to 40?
And all this in the market over here, the rest of the market or what maybe just an index one starts chugging along at 10, 15 percent, 20 percent a year. And you’re over here absolutely making nothing.
That’s what Kenny talked about where you start just getting so far behind in your earnings potential. And that could be one year, two years.
That could be a decade for some people where they will sit here on this hope and dream of this thing bouncing back because they put everything they had into it versus knowing, okay, when to fold them.
I just need to get out of this thing and put it into something maybe more consistent, less sexy, but more consistent. And then a decade will go by and they’ll say, I hate stocks. I’ve never made any money in stocks, not doing this again.
And it’s because they picked one that didn’t work right. Meanwhile, there’s thousands that are doing just fine.
It’s the name of the game, though, right? Yeah, that’s that’s that’s the whole point of the stock market. So, Kenny, I think it’s so funny, but I think it’s the simplest concept that kind of just put a light bulb in my head.
And, you know, I had to Apple here and there. But, you know, it’s funny, like if you go to purchase Amazon today or Apple or Microsoft, they’re already valued pretty high for what their expectations are. Right.
And the way you lay it out, I’m like, that’s such a great point. But the reason I bring it up is when when do you decide to dive in on a company that is a successful company?
Like, I mean, to your point, they could earnings call comes out, a quarterly shareholder meeting and they’re like, we’re 200% down on revenue, you know, whatever.
So like, is there a specific time where if you are looking at a big company that maybe it is a good time to buy? Like, just when you see a dip? I mean, what are your thoughts on that?
Yes.
I mean, I’ll answer that with more of a generic answer. And that is, you know, at any given time, the stock market is probably the most liquid market in the world, meaning there’s so many people on either side of a trade.
So anytime you look at Apple out there, you know, I’m making up numbers, I have no idea what this is, but you know, there’s 10,000 people willing to buy it and 10,000 people willing to sell it.
And that price gets set, you know, at the middle of all this. It’s the wisdom of crowds. It’s the efficient market.
And so the only time that you should be buying a stock is if you think you have some information about why that stock is priced wrong based on what those 20,000 other people decided was a right price.
So it’s saying, okay, what do I know that the rest of those people that are placing these trades, that are willing to put their money where their mouth is by actually trading, setting the price at 100 or 200, whatever it is.
If Apple is at 100 and 20,000 market participants, who most of which are professional money managers, if you look at the actual dollars in the market, the vast majority are not just retail people like you and I, there are people that do this
professionally. Tons of people that have a lot of knowledge are saying, this is what I think the price of stock should be. So what do me, if I’m looking at myself, what do I know that those people don’t know?
If they think Apple is at 100, why do I think it should be 110 or 120? And if I truly think I know something, yeah, that’s your time, but you should think, why do I know something that these people don’t know?
What do I think the right price is so I know what to sell if I actually do buy? And then take a hard look at yourself as saying, answer those questions again. Am I right in this?
Why do I get this feeling type of thing? So I think that’s kind of the answer is to think why you have an advantage in an efficient market because otherwise, in the stock market is an accumulation of all of the returns.
And so if you’re looking at straight odds, it’s a zero sum game to beat the market. If you own every company, you’re going to get the market.
So that means at some point you’re choosing which company you think is not going to do well or which one you think it is going to do well relative to this whole market and someone else is on the other side of that trade making the exact opposite bet.
What do you know that that person doesn’t know?
Which more than likely a retail consumer doesn’t have anything that could back why they want to do that, right?
But I guess, Sean, to your point of like stocks isn’t always the money myth, but like if someone came in your office and said, hey Sean, can you help trade 50 grand into this company for me, right? You know, how would you handle that?
Like are you looking in their background? Like does this make sense? You know, why this stock or you know, are you just making a ticket transaction?
Like how does that look on your end?
Yeah. So it’s conversation of one, we don’t do that for anybody. We don’t let clients dictate their investments with us.
I think that’s a huge, we’ll get into that when we’re talking about paid professionals too, because some absolutely will. You know, Mr. and Mrs.
Client, you come to me and you got 50 grand and you want to buy Rivian, we’re going to talk about that company because it hits home here. And they go, they want to make you happy. Oh, and also, there’s a commission associated with that trade.
Sure, Mr. Client, we’ll buy Rivian for you. But on our end, it’s okay.
Why do you, like we just try to have a conversation. Why do you think that, we’ll just, let’s dive in. Why do you think Rivian is a good company?
Yeah. Well, they’re Arizona. We live in Arizona.
They’re EV. They’re going to be the next Elon Musk. Everyone’s going to own an EV by 2030.
They’re going to save the planet. All these things I heard back before Rivian was going IPO’d, and you just have to sit there, and you have to coach these people through like, okay, that’s great. That’s all you feel.
That’s all you’ve read. These are all good things. But here’s the market obviously knows that it takes into consideration everything that we’re going to do.
But they don’t look at the hopes and dreams of the company. They look at the reality of it in the sense of like what that actual footprint could be for them, how much money they could potentially make, how big could this company be?
And Rivian was one of the biggest local flops I think we’ll ever see where their stock IPO’d, and pretty much went like a little bit up, and then went straight down kind of ever since the IPO.
And people by the droves, again, because we’re in Scottsdale and Phoenix, like it’s a local name, they all wanted a piece of it because they all thought it was going to be the next Tesla.
And then boom, another example of why we don’t pick stocks, because anything can potentially happen. Now, should it have gone the other way? Fine, it wouldn’t be an example, but there’s example after example after example of the situation.
So what we try and get our clients to understand is, look, I’m not willing to take that kind of risk for you. I won’t sleep well, you won’t sleep well. It’s not what we do for our clients.
Here’s what we do and why we do. And if at the end of that conversation, they go, yeah, I don’t really care about that. I’m still going to go buy my $50,000 worth of X stock.
Then I’ll say, great, go open up a Schwab account and do it. And good luck, best of luck to you.
And I think another concept to it is like, what does this money mean to you? I mean, if it’s fun coupons, and you know what? Maybe they do it.
But I think that’s another aspect to it is like, what are you expecting from this money? Is this your life savings that you’ve earned?
We’ve had that conversation before. If you are in such a great place with your financial plan and everything is intact, you can retire when you want to. You could buy that home that you want to.
You can travel like you want to. You’ve got the green light to take 50 grand from wherever and go play with it because it means absolutely nothing to your plan, or even if it’s 10 grand. And that’s something you want to do, great.
I do love it to a sense as it educates people. If you’re passionate about it and you’re reading the Yahoo news stories and you’re sitting on earnings call and it’s keeping your mind sharp, great, but we shouldn’t be doing that with all your money.
If it’s 10 grand of your $2 million or $3 million portfolio, just have fun, learn something, enjoy it. But if it’s 10 grand of your 10 grand portfolio, then that’s when people make the mistake.
And that’s when people say they don’t ever make any money. It’s because you’re not, you’re just gambling. That’s a 50-50 shot right there.
You’re not stacking the odds in your favor.
Well, the other thing I would put on that, Sean, is that you said it’s a 50-50 shot. And I do think that’s kind of how people view it as well. Like, okay, yeah, maybe I don’t know everything.
But there’s a 50% chance I can beat the market, 50% chance I can lose. But if you actually look at the distribution of returns among companies, and this is a study I don’t have in front of me, so I don’t know this for sure, so don’t quote me on this.
But there was an ASU professor that did this study from something like 1930 through 2012, and looked at where stock returns came from.
And what it came down to, if I’m remembering this correctly, was all of the money in the stock market that has been made in that whole 80 years was made by 4% of the companies.
The other 96% averaged out making nothing, and then those 4% made every dollar of wealth, the trillions of dollars of wealth that the stock market has created, were made by 4% of the companies. So it really is feast or famine. It’s not 50-50.
It’s like, hey, either you sit on Apple in 1980, and for whatever reason, never sell it, even if after it goes up, and then it goes down 75% and back up and back down 90%. If you stick with it the whole time, you’re the winner.
But unless you’re doing that, most likely whatever you’re gonna buy is gonna be in that 96% that averages out to make money.
It’s crazy, Kenny, crazy.
When you think about that, that’s really the reason why you want that diversified portfolio, because the risk of missing one of those stocks, if you buy even 100 stocks, and of those 100 you missed Google and Apple, you’re underperforming
drastically. You need the whole pot, otherwise you have that chance of thinking you have a well-diversified portfolio or thinking you’ve got good companies and really not making any money.
Yeah, that is a wild stat. And it’s something sometimes I smile about too. I’m like, you know, Microsoft, Amazon, Google, Apple, it’s like they’ve made so many people so rich.
And yeah, we all didn’t buy it. It’s all these hindsight moments of should have, would have, could have kind of things with stocks. That’s how it always goes.
It’s the same with any investment. Looking backwards is the easiest thing for any of us to do is to say, I wish, but it’s the next 10 years and what that brings. I thought of Bitcoin too, for example, like it’s knowing how to play these games.
Like imagine buying Bitcoin when it was, I don’t even remember how low, let’s say it was five bucks, two bucks. So it’s at $118,000 a coin right now. But at what point did you sell out fully?
Was it when five went to 10, five went to 15? Like no one rides these things from $5 a coin to $120,000 a coin.
And if you did, Sean, hats off.
Yeah, it’s because at some point, one, it goes up so high that you’re just like, this is stupid. Like I’ve made a lot of money. I need to get out.
Or also the whipsaw where it goes up so high, it comes down and the people go, okay, I can’t do that again. And then they sell out at that point. Like it bounces along the way.
So that’s the same. I’m not comparing stocks to Bitcoin, but just that ride, that euphoria that you get of something going up just drastically over almost what? A 15 year period, like an historic amount.
And then looking back and saying, okay, I wish I would have bought more, should have, could have, would have kind of thing.
And that’s what I try and remind my clients about, just investing like in a diversified approach is like, you’re never going to have these years where you’re up 100%, but you’re never going to have a year either where you’re down 75% and have to
weather that emotional toll. So the market’s historically been three steps forward, one step back, meaning for in a four year period, it’s typically up three and down one.
And it’s strung together decades upon decades of great returns that should be doubling your money every seven to 10 years. If that’s not enough for you, then you take the step from investing to speculating.
And that’s what you have to realize that you’re doing when you’re buying individual stocks.
Even if it’s 50 of them, you’re still speculating on these 50 that they’re going to make you the wealth that you need to have to be able to afford that new home, buy that car, retire when you want to, travel, whatever the case might be.
That is the bet that you’re taking with the wealth that you have if you’re out there picking even 51 to 50 stocks.
That is the concept that you’re doing versus, hey, let’s buy all these different stocks, put them all together, get risk-adjusted returns, overweight towards areas of the market that have historically done better than others, and just let this work
for you. And let me tell you what, you sleep so much better. I do, my clients do.
I know Kenny does when you just know that’s in place, and you don’t have to sit here every day and wonder what the next 10 stocks are going to do, or what are the next best 10 stocks that my clients need to have?
Because you’re just left reeling when that becomes your investment philosophy.
Yeah, that would be the other thing I would say is, there’s got to be a peace of mind aspect to this.
If you pick individual stocks and you’re trading out of them, watching the news every day and freaking out, and you have that FOMO, or you have the fear of not missing out on something, but if something goes down that 50% or 75%, and over the course
of a lifetime, if you’re investing for 30 to 50 years, even if you end up doing great, and what I consider great is matching the market, how much more stressful was your journey to get there? And so I do think that’s why, unless you just absolutely
love doing this, and you have one of those personalities where you don’t feel that risk, and you don’t feel that loss, then I don’t think you can just ignore that aspect of it. Because even someone like Sean, you talk about yourself, and all of us
are professionals here, I’ve dabbled in this stuff as well, especially when I was younger, and I do not have the personality or the makeup. Anytime I’m even a little bit invested differently than what would be a vanilla portfolio, I start freaking
out. So there has to be some aspect of how much you can just live with yourself and live your day-to-day life versus this is all consuming and something that causes you a ton of stress.
Yeah, and that has forever fascinated me too. The people who are willing to manage their finances, their family’s finances, or even if it’s just their own, their finances on their own.
But yet, I’ve used me for an example, but yet I will pay someone to do my pool, clean my pool every week.
But yet I think, again, I don’t think, but some people think that they can manage their finances on their own, but yet they have someone clean their pool.
The risk trade-off there, it’s like, this is your livelihood that in your finance, your family’s finances, that you’re unwilling to at least sit down with a professional, get a second opinion, but you’re too lazy to clean your pool.
Like the risk associated with having a dirty pool versus losing all your money. I always do this trade-off with clients in my meetings of when they kind of talk about fees and I don’t want to pay anybody. I’m like, okay, do you have a pool person?
Do you have a landscaper? Yeah, yeah. Why do you do that?
Well, for ease and they do a good job and I don’t have to worry about it. Well, that’s exactly what I’m doing for your money. And they just don’t get it because they think that they can easily just buy an index fund or buy five stocks.
And it’s just a fascinating mental thing that finances are easier to do and it’s the control. It’s absolutely control over what’s going on with their money.
And it just takes one real bad mess up to get a decade behind and then another bad mess up to get just pretty much completely eroded of your wealth. And now you’re starting all over again. All right.
Thoughts? Anything?
Well, I think we’ve talked about this is the retail world. And I think some people want to pick their stocks or at least have a Vegas account type of thing. But I think a lot of a lot of the individual stock picking has moved on.
And I think most people today think, you know what, if I want to invest, I probably should hire a professional.
And we’ve kind of touched on this a little bit, but I think kind of the next evolution of this conversation is, okay, is this conversation different moving from, you know, mainstream investor Joe Schmo to professional investor on Wall Street?
And what does that look like? Is that someone that I can count on? That, you know, they do have the information, they do have the knowledge.
What does that look like? How does this conversation change when we kind of take it up a step to your professional investor?
Yeah, I love this because this is what is scary about the whole industry is you’re looking across the desk from a paid professional. It’s kind of the same thing as looking at a doctor.
You know, you think you’re hoping they have your best interest in mind. You’re hoping they’ve got a sound philosophy and that they’re going to treat your money like they treat theirs.
That last piece where they treat your money like they treat theirs is probably the most grossly, I’m not even sure the right word, just grossly different thing that I’ve ever seen. Like it’s them telling you to do one thing with their money.
Meanwhile, this professional advisor is completely doing something different with their money. Everywhere I went, I saw that. Their clients were invested one way and this advisor is doing something completely different for themself.
And I always thought that was the most insane conflict of interest and just lack of conviction too. At our firm, that is absolutely not the case. My money is invested exactly like my clients.
My family’s is invested just like all my other clients and mine. Everyone’s the same. So that was always fascinating to me.
And I think that’s a problem right there for the industry is when you have an advisor telling you one thing to do with your money, that they’re unwilling to do with theirs.
Another thing is how is it retail client going to have enough questions or be equipped enough to know what an advisor is even doing with their money?
I find that tough because there are numerous advisors out there and anywhere you go who will pick stocks just like we said, don’t do for the retail person.
Well, just because this guy has a nice mahogany desk and a sweet suit and he’s still picking stocks for you doesn’t mean he has any or she has any idea of what’s going on in the stock market.
Just because they got a screen over here, I’m thinking of billions right now with all the fancy little charts and greens and reds flashing and maybe a Bloomberg Terminal.
They have no idea what stocks are going to do well, but they will gladly tell you like, hey, these are our best 50. We’ve got the smartest people on it. This is what we’re going to put in your portfolio.
Well, now they’ve just done exactly what we’ve told the retail client not to do that they’re willing to do for your money, which is gambling. There’s no philosophy other than maybe they do have some type of hypothesis.
Maybe they’re market timers in the sense that they follow charts and trends, or they just buy the top 50 stocks in the US. Whatever that is, that’s still somebody’s best guess of the future, which to me equals speculating.
Yeah, and this is where you have to come back to the empirical evidence. And look at that twofold. One would be, where are the returns?
If the professionals were very good, the stock market or investing is one of the most highly regulated industries.
So if you are doing well, there’s someone that knows it and you can prove it, and you can put your returns out there, you can put it on every piece of literature, and you’re a star performer.
And then the second piece of empirical evidence is, this is the easiest way to make money if you know what you’re doing.
Sean, you and I have talked about this, but there’s been one person in the last 50 years who has figured out the stock market and made money. His name is Jim Simons. If you’re ever interested in a case study, look him up.
He created this fund. He figured something out. He was like one of the best mathematicians in the country and the world.
Figured this out, ran this fund for a couple of years, made obscene returns, closed the fund to everyone, but friends and family, and just made billions and billions of dollars. That’s someone who actually knows how to beat the market.
That’s the exact linear progression of what you would expect if someone could beat the market. But that’s the only example.
One person. How many have tried that is the real question.
If you think of the smartest people in the world, what they generally want to do, yeah, I mean, they have some altruistic goals. They want to cure cancer and do all these great things.
But truly, if you’re the smartest people in the world, if you can even do slightly above average picking stocks, you compound that over a decent time period, you make so much money and no one is doing that.
Outside of that one example, there’s just the data doesn’t support that.
And so, if the smartest people in the world aren’t making money trading individual stocks, not only just me as a retail investor, why do I think some guy with a finance degree sitting in Wall Street is all of a sudden going to do better than the
Yeah, or even the advisors just sitting in the office down the street who’s telling you what they’re doing.
If I knew how to pick stocks, I wouldn’t need a single client. I would just make money for me and my family. And that is, I know that’s funny, and it kind of sounds like a joke, but it’s so true and the easiest thing.
So if you’re sitting in a meeting with a financial advisor, or that is your financial advisor style, hey, I want to sell these five stocks, buy these five more.
I wouldn’t say you’re their guinea pig because maybe they’re doing it in their accounts too, but they’re trying to figure out an investment theme along the fly with your money, and they’re gambling with your money to see if this works out.
If they knew that this was going to work out, but they wouldn’t need you. It’s some aspect of gambling to be able to prove their value to you. And that’s what I’ve found fascinating and saw mainly.
When I worked at Edward Jones, that was the most financial advisors obviously I’ve ever worked for. Everyone was a financial advisor.
And I saw it time and time again that the advisors in that firm in our area, they confused their value with picking stocks to generate more return for you than actual the financial planning aspect.
So what happens when that’s the case is they start sticking their necks out. And again, we’ve gone from investing to speculating.
And that’s where the huge missus in our industry, I believe, is my value to my clients isn’t to make them god amounts of money and make them super rich. If I knew how to do that, I’d just do it for myself, and life would be so much simpler.
My value for them is to be able to have a financial plan, stick to an investment philosophy that works and will make them money as the decades go on and it will make them rich.
It absolutely will, and I’ll be the coach along the way to make sure it works, and have a plan in place to make their taxes lower and their tax-efficient strategies better and handle distribution. All this other stuff. That’s why you pay somebody.
So if you’re paying someone and you think it’s because they’re bringing you good sound investment advice or new ideas every quarter, you’re working with somebody who’s just picking and choosing and guessing and stabbing, and shooting a gun in a dark
room to see what they might hit. And that’s a scary place to be for a lot of retail clients. But they don’t know otherwise. They literally think that’s the industry and they think that’s what that paid professional is there for.
And Sean, someone might be listening to this thing.
Well, I’m up right now, so eat that one. And it’s like after this conversation, I’m like, if there’s one guarantee is that you’re probably not going to end up being up. So I guess, what is the solution to it?
Like, you know, what I’m hearing is that, you know, retail person can’t really pick stocks. Wall Street guys in the skyline, that mahogany desk can’t pick stocks. But it’s like, what do you do then if you are just a consumer retail investor?
Great question.
Kenny, this is where you shine, bro. This is your moment.
So mutual funds, Kenny?
I mean, it does sound hopeless, right? It’s like, oh, right. I don’t have any information.
I’m the low man on the totem pole. Even the high man on the totem pole can’t make money. So what is there?
And it’s good to remember that what we’re talking about here is making some considerable amount of money above what a market portfolio, S&P 500, Sean mentioned a couple, the overall stock market.
What we’re talking about is the ability to overperform that. I think the real question is why people think they need to overperform that. And obviously, if you can, that’s great.
It’s more money. We get that. That’s common sense.
But I think what a lot of people probably don’t realize is if you go back, however far you go back, 40 years, 60 years, 80 years, 120 years, the long-term average rate of return of the market being an S&P 500-type portfolio is about 10% a year.
And so we’ve talked about this on previous episodes, but 10% a year means your money is doubling in 10 years. It doubles in 7 years at 10%. So it means it doubles again in 14, doubles again at 21, doubles again at 28.
If you’re investing consistently and just sitting back and letting that do its job, if you have a 35, 40-year career where you’re just contributing what you can to, get your 401k match, start maxing out a Roth, start throwing some in just a brokerage
account when you start making more, all of a sudden, after 20, 30, 40 years, you’re getting so much compounding, even at these rates of return, that you will be very, very wealthy had you not made any of these big mistakes without ever having to do
Hats off, Kenny.
Well said, buddy.
That’s the answer. It is actually optimistic. It’s not like this downside is, I don’t need to do anything special to have success.
But it’s boring.
It’s not sexy. That’s the problem, right?
We all want to be rich yesterday, and we’re all willing to listen to a hint, or hear a friend, or take a risk, take some kind of gamble that might work out. It’s the same as going to the casino and playing roulette, black or red. All right.
Well, it’s hit black the last five times. So this is going to be red. Like, let’s put the 100 on it.
And then, boom, black again happens, and you’re pissed, and you got your tail between your legs, and you got no money left. It’s the same with stocks. It’s I want to make, I want to be richer.
We all want to be richer. We all want nicer things, better things. It’s just the American capitalistic society that we live in, and we don’t want to be rich.
The amount of times I hear this, I don’t want to be rich when I’m 60, Sean. I want to be rich when I’m 40. It’s like, okay, well, how much are you willing to save for the next decade or however early we can to make that?
Well, I don’t really, I just want something like the get rich quick. Rich, yeah, quick. It’s like, it’s all fool’s gold, man.
It’s all the same thing. And some people, it has happened. The people who bought Bitcoin, the people who sat on this stock, the people who get lucky, but they have to admit to themselves it was luck.
It wasn’t skill. And that’s the hardest thing. They’ll never tell you that on TikTok.
They’ll never tell you that on Instagram that they got lucky. They’ll make you seem they’re all smart. They’ll write a book about it.
They’ll sell their trading algorithms to you. Follow my pics for 15,000 a month, and you can make blah, blah, blah. It just becomes a marketing scheme.
So be weary of all those things. So yeah, there are many investment philosophies that are worthwhile to pursue, that aren’t sexy, but aren’t risky in the sense of you could lose it all. And that’s what I tell my clients, just like what Kenny did.
Look, if I’m doubling your money every decade, then I did my job. And if that’s not okay with you, then this relationship probably isn’t gonna work. But there are plenty ways to do it.
Own a bunch of stocks, know which ones to own in regards to areas of the markets. Remember, we’ve talked about this before.
There’s large cap companies, there’s mid cap companies, there’s small cap companies, there’s international companies, there’s bonds. Know the proper mix for you and your family and what goals are associated with each investment account.
Is it for the next 30 years versus the next five years? Those are very different investment approaches that we have to take for you. So there are bright ways to do it.
The whole myth though, is that speculating by thinking you can pick individual stocks, whether you’re a retail investor just doing it yourself, or you’re working with a paid professional who thinks they can do it themselves, is a huge swing and a
miss in the sense that they’re just gambling, you’re just gambling. And if you’re doing it out there listening and you are picking stocks, like gut check, you know what you’re doing.
You know every morning you wake up, you get excited to see if it’s going to be up. And if it is, you feel good, and if it’s down, you feel bad. And that’s just what gambling is.
There’s no philosophy, there’s no theme, there’s no approach to it other than, I just hope these five stocks do well. And that’s the same as going to picking the five numbers on the power ball. I hope these all hit.
It’s the same concept. So yeah, this was an awesome conversation. Kenny, thank you so much for joining us.
I hope this was eye opening to the listeners out there that stock picking is not the way to go. It is a huge money myth and can set you decades behind in growing your wealth. And if you disagree, reach out to us.
I love having this debate with people that…
Love to hear it, Sean. I’d love to hear it.
That picks stocks. And it’s so easy because it comes down to the person who tells me they made a bunch of money on stocks. And I go, great.
Did you actually sell and get out? Yeah, I did. Okay.
Well, do you realize that it was luck or skill? I was probably pretty lucky. Okay.
Boom. There you go. You hit the lottery.
Moving on. Next one.
Boom.
Roasted.
Any last quotes from you, Kenny? Any last thoughts?
No, no good quotes. It’s a good conversation to have.
And I think it’s, in terms of myths, this is probably number four on your show, but it’s probably the number one out there that people need to get beyond to really understand what prudent, smart investing is.
Agreed. Yep. If we could get people to let go of it, they would be better off.
So much better off and just sleep easier. Could you imagine gambling with your wife’s finances and you’re down 50% one day? Like how are you sleeping next to your wife?
Like, are you up that night? Yeah, you’re probably up that night. Like, it’s not a good time.
You’re not probably eating very much either during that day. All right, boys. Good to see you all.
Thank you so much for joining. And yeah, have a great rest of the week.
Appreciate you, Kenny. Appreciate you, Sean. Thank you, guys.
See you, guys.